The loonie had its biggest one-day drop since October after weaker-than-expected consumer prices reduced the chances of an early rate hike and the U.S. dollar strengthened.
The Canadian dollar fell more than 1.5 cents US after a report that showed the Consumer Price Index rose 1.3% in December. Analysts had been expecting a gain of about 1.6%.
The loonie fell from a close of $1.0307 on Tuesday to finish Wednesday at $1.047.
The Bank of Canada yesterday left interest rates unchanged at historic lows and reconfirmed its commitment to maintain the status quo until at least the end of the first half unless inflation heats up.
“The CPI was relatively benign and reaffirmed indications that rates in Canada will remain on hold until at least the middle of this year,” said Rob Wittmann, chief executive of Knightsbridge Foreign Exchange.
Also hurting the Canadian dollar was renewed strength in the greenback. A combination of lower commodity prices, concern over Chinese moves to tighten credit and a Republican win for former Senator Ted Kennedy’s Massachusetts’ seat all helped push up the U.S. currency.
The Republican win prompted speculation over the future of President Barack Obama’s attempts to overhaul healthcare legislation. The market is concerned the reform will further boost the record deficit.
Market watchers say today’s drop in the loonie is likely to be short-lived. Most analysts expect the Canadian currency to reach parity with its U.S. counterpart some time this year.
“The buy Canadian sell U.S. dollar trend is likely to resume unless we see any big sovereign risk shocks,” Wittmann said.
That’s not good news for the country’s struggling exporters. The central bank warned yesterday that the strong loonie, coupled with weak demand for goods south of the border, continued to drag on the economic recovery here.
Manufacturing sales figures released today support that view. Sales edged up a weaker-than-expected 0.1% to $42.6 billion in November, Statistics Canada said. Gains in several industries were offset by decreases in the transportation equipment industry.
